Mumbai, April 22: A wide chasm separates bankers who reckon the cash-reserve ratio (CRR) and the bank rate will be slashed and those who think Bimal Jalan will not drive down the cost of money already going cheap.
Most agree that the monetary and credit policy to be presented next Tuesday will take 25 basis points off the CRR — the rate that determines how much of banks’ deposits is locked up in the Reserve Bank’s vaults. The bank rate, a notional rate used more as a signalling device on the price of money, could fall just as much.
Also on the menu is a deregulation of interest rates on rupee export credit and a roadmap to widen the repo market by letting more entities trade in a greater variety of financial instruments. Companies, kept out of this segment for years together, could move in, while the entire gamut of debt, including corporate bonds, could find its way into this long-sheltered avenue.
The Reserve Bank brought down the bank rate to 6.25 per cent, the repo rate to 5.5 per cent and the CRR to 4.75 per cent in October last year. In February, the repo rate was pruned 0.5 percentage point, while the interest rate on savings accounts was cut to 3.5 per cent.
Though saving accounts will be spared this time, bankers who see a 25 basis point cut (half a percent on the higher side) in the CRR and the bank rate say the anticipated reductions will be in line with the central bank’s avowed objective of resting the CRR at 3 per cent. There is a degree of unanimity that a cut in CRR will become effective from the second fortnight of May.
A 25 basis point reduction in CRR will infuse Rs 3,000 crore into the banking system, meeting in large part the demand for lower interest rates to support a revival. “A less-than-normal monsoon has also been projected by the Meteorological Department. Such a situation warrants lower interest rates,” a senior banker said.
UTI Bank executive director M. M. Agrawal feels a cut in CRR will keep the market liquid and force banks to slash deposit and lending rates. “A social security mechanism for those living off deposits should be looked at.”
There are others who see no need to bring down the CRR at a time when the banking system is awash in cash. “The need for liquidity will be felt more in August, when the Reserve Bank will need resources to meet the requirements of Resurgent India Bonds,” says ICICI Bank vice-president N. Balasubramanian said.